Time-Varying Risk Aversion and International Stock Returns

48 Pages Posted: 12 Jul 2023

See all articles by Massimo Guidolin

Massimo Guidolin

Bocconi University, Dept. of Finance; Bocconi University - CAREFIN - Centre for Applied Research in Finance

Erwin Hansen

University of Chile - Department of Business Administration

Gabriel Cabrera

University of Chile

Date Written: July 12, 2023

Abstract

We estimate an aggregate time-varying risk aversion function using option, stock return and macroeconomic data for a sample of 8 countries. We document that, in most of the countries, the degree of risk aversion is countercyclical. Moreover, we show that the estimated risk aversion function forecasts monthly stock index returns up to 12 months ahead. This effect is statistically significant in panel regressions, and it survives the inclusion of additional control variables.

Finally, we show that the estimated time-varying risk aversion function provides useful information to an investor who aims at timing the market. An investment strategy that uses the estimated time-varying risk aversion measure to solve a mean-variance asset allocation problem, delivers significant returns.

Keywords: Implied risk aversion, forecast stock return, market timing, mean-variance asset allocation.

JEL Classification: G10, G11, G15

Suggested Citation

Guidolin, Massimo and Hansen, Erwin and Cabrera, Gabriel, Time-Varying Risk Aversion and International Stock Returns (July 12, 2023). BAFFI CAREFIN Centre Research Paper No. 203, Available at SSRN: https://ssrn.com/abstract=4507444 or http://dx.doi.org/10.2139/ssrn.4507444

Massimo Guidolin (Contact Author)

Bocconi University, Dept. of Finance ( email )

Via Roentgen, 1
2nd floor
Milan, MI 20136
Italy

Bocconi University - CAREFIN - Centre for Applied Research in Finance

Via Sarfatti 25
Milan, 20136
Italy

Erwin Hansen

University of Chile - Department of Business Administration ( email )

Diagonal Paraguay 257
Santiago, 8330015
Chile

Gabriel Cabrera

University of Chile ( email )

Pío Nono Nº1, Providencia
Santiago, R. Metropolitana 7520421
Chile

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
260
Abstract Views
696
Rank
218,672
PlumX Metrics